The Great Indian obSEZsion

After a slow beginning, Special Economic Zones (SEZs) may have finally started drawing investors' interest. But instead of obsessively vying for investments in such privileged zones, policy makers first need to address the underlying structural problems in the economy, if they really wish to radically improve the performance of SEZs, and consequently, India's exports & FDI status.

The six year old EXIM policy, which paved way for setting up special economic zones in the country, seems to be slowly but steadily setting pace for Foreign Direct Investment (FDI) into India. On January 18, 2005, while speaking at the Confederation of Indian Industries (CII) Partnership Summit in Kolkata, Commerce Minister, Kamal Nath, said that as of date, about 70 proposals envisaging investments to the tune of Rs.100 billion are in the pipeline to be cleared by the Ministry.

According to him, once the Special Economic Zones' Act is notified by the government, India could witness a mammoth surge of FDI. However, before being swept away by the euphoria generated by the news about the "pending proposals", one needs to assess the performance of Indian SEZs, as well as, the present investment environment in the country.

In the year 2000, when the ruling National\ Democratic alliance (NDA) government decided to establish SEZs to boost the country's ever lagging exports, the then Commerce Minister - late Murasoli Maran - was quite upbeat about its success. Speaking at the International Convention on Special Economic Zones, organised by FICCI (Federation of Indian Chambers of Commerce and Industry) in March 2002, Maran termed his govern government's decision to set up SEZs as one intending "to provide quantum jump to production for exports and consequent employment opportunities..."

However, five years down the line, the contribution of existing SEZs to overall exports still remains unsatisfactory (though some may consider it too early to comment). Policy makers may be quick to cite India's late entry in the SEZ race (compared to China) and the long gestation period of SEZs as a justification, but they can definitely not justify the lack of will of successive governments to address core issues like labour market reforms, which are essential for attracting investment.

In 2003-04, while existing SEZs contributed to only 4.71% of total exports of Rs.293.37 billion, their contribution in the succeeding year grew by a paltry 0.4%, to crawl up to 5.1%; with SEZs like Jaipur SEZ being able to earn foreign capital of a meager Rs.50 million. In 2004- 05, the Santacruz SEZ contributed 45% of total exports from SEZs, while Noida SEZ registered approximately a threefold increase in exports.

Performances of the remaining SEZs were not up to the mark; barring the Surat SEZ (that had about 77% growth). So, is the zeal earlier shown by Maran, or the renewed one that we see in Commerce Minister, Kamal Nath, really going to help India replicate the Chinese success story?

Well, pragmatists may see a lot of light at the end of the tunnel, but if economists like Rajiv Kumar of CII are to be believed, unless certain fundamental questions related to infrastructure and the regulatory framework are answered, Indian SEZs are not going to yield any-thing significant to either bring in FDIs, or boost exports.

It's a sad irony that in a world of globalization, where international relations are beginning to be more and more governed by trade considerations, India, which contributes nearly 6% to the world GDP, has a petty share of 0.8 % in global trade. It is interesting to note that in 1948, India's foreign trade stood at around 2.2% of the world trade. However, the repressive policy of 'import substitution' and 'license raj' not only brought down this share to almost 0.8% towards 2004, but impeded India's overall economic growth.

Such protectionist industrial policies, along with populist labour laws, badly affected the competency level of India's manufacturing sector - thus making the 'Made in India' brand a dubious one, for its inferior quality - and created the image of an Indian worker as one forever ready to confront the management with the support of hostile Trade Unions.

Dr. V Krishnamurthy, Chairman, National Manufacturing Competitiveness Council, agrees to the fact that trade unionism has only benefited roughly 2 to 5% of the total workforce in the past. According to him, of late, "Trade Unions are more concerned about protecting the interests of the current working population in the organised sector," rather than about opening up their minds to the prospect of increase in employment opportunities that increased investments are likely to provide.

He, though, cautions that considering the mood that currently prevails among trade and labour unions, any attempt to bring about radical reform in the labour market regulations is bound to be met with stiff resistance. According to him, "There is a need to first educate the Trade and Labour Unions about advantages of flexible labour laws."

In early 80s, when China went ahead with the SEZ experiment, its main objective was to attract investment for an economy that was essentially closed to any form of foreign investment. Mao's experiments with Cultural Revolution and The Great Leap Forward had already done a great damage to the Chinese economy. So when China decided to establish SEZs, it did away with dogmatic regulations that were responsible for its incompetence.

Despite being a communist regime, it adopted flexible labour regulations in those SEZs that attracted foreign investors eyeing its cheap labour in the manufacturing sector. As a result, after being able to attract low investments to the tune of $3.5 billion in the take off phase, its contribution to the gross FDI shot up to $50 billion.

CII's Rajiv Kumar strongly feels that in order to make Indian SEZs equally attractive as their Chinese counterparts, the present government "needs to take a radical step in addressing the long standing demand by the corporate houses to reform labour market in India."

Sez the Shenzhen city

(column by Kalyan Upadhyay)

Though the concept of free zones dates back to 1986, it was the success of Chinese SEZs that inspired our policy makers to experiment with Special Economic Zones. In 1979-80, China opened up its economy to foreign investment with the establishment of Shenzhen SEZ. Situated close to the Hong Kong port, this small fishing hamlet has today acquired the distinction of being the manufacturing hub of the world with a GDP of $20 billion and an annual foreign trade of nearly $50 billion.

In fact, the extent of its pull can be understood from the fact that 17 of the world's top multinationals, including IBM, Compaq, Seagate, Sanyo, Nortel and DuPont, are already running their operations from Shenzhen. The electronic information industry that accounts to almost 92% of its high-tech output has a capacity of producing 5 million TV sets in a year.

More than 1500 enterprises in the city, which produce computer parts, have a capacity to meet the requirements of 20 million computer sets. Infrastructure is not a problem in Shenzhen city as the city's Huangtian International Airport is able to effectively handle the fourth busiest air traffic in the country. Its eight harbours and twelve cargo docks have the capacity to handle over two million tonnes equivalent units in twelve months.

Unlike Chinese SEZs, which have market friendly labour laws, in India, the labour laws applicable to the rest of the country are equally applicable in the SEZs. The only concession that SEZs get is that the state government, under which they fall, may declare units within SEZs as public utilities. But considering the state governments' track record on economic issues, it would be too early to expect a bold initiative on their part.

Rajiv Kumar also highlights the need for policy makers to pay equal attention towards improving the country's fragile infrastructure. Indirectly referring to the desperate rush, which certain states have shown in setting up SEZs, Kumar questions the viability of such SEZs in the absence of proper infrastructure. "What is the use of setting up a world class SEZ, if the road that leads to it is not good?" he asks.

It's a concern jointly shared by O. P. Garg, President, Federation of Indian Exporter's Organisation (FIEO), who highlights multiple reasons which have, so far, kept foreign companies from investing in India. "Poor quality of infrastructure, stringent labour laws and complicated tax procedures are factors affecting investment. In the post-quota regime, Indian textiles industry could not reap full benefit of foreign investment in the sector due to our inability to provide flexible labour policy.

The infrastructure bottlenecks are adding to the cost of exports as each day delay at ports adds to 0.5% of the export cost. If a consignment is delayed for 10 days, the cost of the product is escalated by 5%, which will make you uncompetitive when you are working on a wafer thin margin." He complains.

According to a study titled 'Trading on Time', jointly conducted by the World Bank and the International Finance Corporation (IFC), "On an average, each additional day that a product is delayed prior to being shipped reduces trade by at least 1%." The study further goes on to state that such delays have greater impact on the exports of developing countries if the products are time sensitive like perishable agricultural products.

And although the report falls short of directly indicting India, its observation that an average of 32 days is required for export of commodities among SAFTA (South Asian Free Trade Agreement) nations, which includes India is self explanatory.

But coming back to investments, in a similar study conducted by the World Bank (Doing Business in 2006), India is placed 116 ranks below New Zealand, which tops the chart among countries. In this study, it is estimated that on an average, it takes a pathetically large 67 days for registering property in India. If you thought this figure was high, then you would perhaps be stupefied that the average time taken to exit a business in India is estimated to pitiably stretch to 10 long years.

On another front, according to some economists, the miserably long lock-in period for FDIs in India is one of the primary reasons why foreign investors feel insecure about investing in the country. Consider this that the official lock-in period is a maximum of two years for the Chinese mainland, and one year for Hong Kong.

India has had a long history of trade with the rest of the world. Stories on how Vasco-da-Gama scaled the frontiers of Indian Ocean to land in Calicut (Kerala) in 1497, themselves highlight India's significance in trade in ancient times. But towards the 19th century, trade conditions changed drastically for India with imperialism and technology turning the terms of trade in favour of imperialist powers.

Over two hundred years of economic exploitation, along with the influence of socialist Russia, influenced Jawaharlal Nehru to adopt the socialist model planned growth. But the empirical evidence suggests that instead of being a facilitator of economic growth, stringent regulations have actually prevented India from realising its true growth potential.

The enthusiasm shown by Kamal Nath is welcome, but such enthusiasm would be of no aid to India's ambitions to double its share in world trade by 2009, if other underlying concerns continue to be ignored by our policy makers, like has so oft en been done in the past.

The government should realise that the existing labour laws, as well as administrative regulations help nobody, but a microscopic minority of trade unionists and bureaucrats. For the majority of workforce, it's a no-win situation as they continue to be exploited in the hands of unscrupulous employers. India's obsession needs radical change; and now!

(End of Kalyan Upadhyay column)